Tribunal adjusts software development transaction comparables, omits working capital & risk issues.

The Tribunal partly allowed the appeal, directing the AO/TPO to recompute the adjustment to the software development transaction by excluding or including specific comparables. Grounds related to working capital adjustment and risk profile were not adjudicated due to insufficient evidence. The decision was pronounced on 28th February, 2019.

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Issues Involved:
1. Legality and validity of the assessment order.
2. Jurisdictional error in referring the matter to the Transfer Pricing Officer (TPO).
3. Addition to the returned income by re-computing the arm's length price (ALP) of the international transaction.
4. Invoking provisions of Chapter X of the Income Tax Act.
5. Charging and computing interest under sections 234B and 234D.
6. Initiating penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Legality and Validity of the Assessment Order:
The appeal contended that the assessment order passed by the Assessing Officer (AO) is "bad in law and void ab-initio." However, this ground, along with others such as general nature (Ground Nos. 1 to 3.1), was not specifically adjudicated upon by the Tribunal.

2. Jurisdictional Error in Referring the Matter to the TPO:
The appellant argued that the AO did not record any reasons to conclude that it was "expedient and necessary" to refer the matter to the TPO for computation of the arm's length price, as required under section 92CA(1) of the Income Tax Act, 1961. This issue was not specifically adjudicated upon.

3. Addition to the Returned Income by Re-computing the ALP:
The appellant challenged the addition of INR 42,11,57,036/- to the returned income by re-computing the ALP of the international transaction related to software development services. The Tribunal analyzed the comparables used for benchmarking the transaction:

- Infobeans Technologies Ltd.: The Tribunal found conflicting information about whether the company was engaged in software development services or sale of software products. The matter was restored to the AO/TPO for verification.

- Mindtree Limited: The Tribunal concluded that the company was engaged in research and development activities, making it functionally different from the assessee. The company was directed to be excluded from the final set of comparables.

- Persistent Systems Ltd.: The Tribunal noted the need for verification of the revenue streams of the company to determine if it included revenue from royalty or sale of software products. The issue was restored to the AO/TPO for further investigation.

- Thirdware Solutions Ltd.: The Tribunal found that the company was engaged in software development, implementation, and support services, making it functionally similar to the assessee. The company was retained in the set of comparables.

- Acropetal Technologies Ltd.: The Tribunal upheld the TPO's decision to exclude this company due to significant intangibles and extraordinary transactions affecting its profit results.

4. Invoking Provisions of Chapter X of the Income Tax Act:
The appellant argued that the AO erred in invoking the provisions related to the avoidance of tax, as the appellant was eligible for tax holiday benefits under the Software Technology Park of India (STPI) Scheme. This ground was not pressed by the appellant's counsel and was dismissed as infructuous.

5. Charging and Computing Interest under Sections 234B and 234D:
The appellant contended that the AO erred in charging and computing interest under these sections. This ground was claimed to be consequential and was not specifically adjudicated upon.

6. Initiating Penalty Proceedings under Section 271(1)(c):
The appellant argued that the AO erred in initiating penalty proceedings under this section. This ground was also claimed to be consequential and was not specifically adjudicated upon.

Conclusion:
The Tribunal directed the AO/TPO to recompute the adjustment to the software development transaction after excluding/including the comparables as decided. Grounds related to working capital adjustment and risk profile were not adjudicated due to lack of evidence. The appeal was partly allowed for statistical purposes. The decision was pronounced in the Open Court on 28th February, 2019.

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